Climate-Change Proposal in U.S. Poses Pascal’s Wager: EconomyVictoria Stilwell
The Environmental Protection Agency calls its carbon rules an economic winner that will deliver more than $10 in benefits for each dollar spent on compliance.
The U.S. Chamber of Commerce says the economic costs of implementing the greenhouse-gas controls will be much higher than the EPA’s estimates indicate and will mean lost jobs, bigger electric bills and missed opportunities for growth.
Both sides are skewing their numbers and overselling their conclusions, say economists from Wall Street to Harvard University. And the impact either way on the U.S.’s $17 trillion economy is likely to be modest, according to Kevin Kennedy, director of the U.S. Climate Initiative at the World Resources Institute, an environmental research group in Washington.
“When you consider the overall size of the U.S. economy, the types of economic changes that you’re likely to see if you take actions or if you don’t are actually very small,” said Kennedy, who adds that the plan’s benefits still outweigh the costs.
His conclusions are shared by Lawrence Goulder, a professor of environmental and resource economics at Stanford University. Goulder’s view of the cost-benefit balance suggests a modern analogue to the famous wager on God’s existence proposed by 17th-century French philosopher and mathematician Blaise Pascal.
Pascal argued that because the potential benefit of accepting God’s existence is infinite, while one has little to lose from faith in a falsehood, a rational person should believe.
“One can view climate-change policy as a kind of insurance -- we don’t know how much climate change will occur in the absence of policy, nor do we know how much policy will reduce climate change and the associated damages,” Goulder said in an interview. Nonetheless, “given the scientific understanding at this point, the expected benefit should be much greater than the costs of the policies.”
A report released June 24 by a bipartisan group of political and financial leaders sought to answer one of those questions, concluding that the U.S. economy faces losses from climate change that may run into the hundreds of billions of dollars. The initiative was led by former U.S. Treasury Secretary Henry Paulson, billionaire investor Tom Steyer and former New York Mayor Michael Bloomberg, the majority owner of Bloomberg News parent Bloomberg LP.
President Barack Obama’s plan, released June 2 by the EPA, calls for reducing carbon emissions by about 17 percent from current levels by 2030. The government is setting standards for each state based on the carbon emitted from coal- and gas-fired power plants, and it will be up to state officials to come up with ways to meet the targets.
States’ options include increasing use of cleaner fuels such as renewable and nuclear energy, reducing consumption of electricity and improving how efficiently energy is generated.
Public-health and climate benefits resulting from the pollution cuts will be worth as much as $93 billion a year by 2030, the EPA estimates.
The public-health gains include eliminating as many as 6,600 premature deaths, 150,000 asthma attacks in children, and 490,000 missed school and work days annually by 2030 as emissions of non-carbon pollutants such as sulfur dioxide, nitrogen oxides, particulate matter and mercury are reduced alongside carbon emissions. Among climate benefits, the EPA calculates economic values for changes in agricultural productivity, flood risks, heating and cooling demand and availability of fresh water.
EPA estimates show those benefits dwarfing annual costs of complying with the standards, which the agency pegs at up to $8.8 billion by 2030. That sum includes costs of capital investment, new capacity, shifts in the mix of fuels used, deployment of energy efficiency programs and other actions.
While the health rewards are calculated for the U.S., the climate benefits are computed on a global basis.
That’s a debatable approach because national regulatory policies typically focus on the gains to citizens, said Adele Morris, the policy director for the Climate and Energy Economics Project at the Brookings Institution in Washington. The plan can still be justified counting the U.S. climate benefits with the health benefits, she said.
The EPA justifies using the bigger global climate benefits because it says pollution created in the U.S. contributes to damages around the world.
Of the $31 billion in annual climate benefits the EPA is counting, all but about $3 billion occur outside U.S. borders, according to an estimate by Robert Stavins, a professor in Harvard’s John F. Kennedy School of Government and director of the university’s Environmental Economics Program in Cambridge, Massachusetts.
Yet even using the U.S.-only estimates for climate and health benefits, the gains still outweigh the costs, says Stavins, a former chairman for the EPA’s Environmental Economics Advisory Committee.
The U.S. Chamber has been among groups projecting the costs to the economy will be much higher. Before the EPA plan was released, it estimated the economic impact of a more stringent 42 percent drop in carbon emissions.
The business federation’s study found the regulation would lower gross domestic product by an average $50.6 billion, or 0.3 percent, each year through 2030 due to opportunity costs, or economic growth sacrificed because of “spending in pursuit of regulatory compliance rather than economic expansion.” The study also concludes that higher electricity prices will lower household spending or savings rates.
The Chamber hasn’t had time to put a price tag on the more modest emission reductions in the actual EPA proposal, spokesman Matt Letourneau said in an interview. The group’s original estimate took about nine months to complete, he said.
An analysis by Goldman Sachs Group Inc. adjusted the Chamber’s projections to the EPA’s announced plan and found the resulting reduction in GDP would be closer to about 0.1 percent or less, economist Alec Phillips wrote in a June 4 note.
Letourneau of the Chamber called Goldman’s assessment “premature.”
Even using the Chamber’s original figures, the economic impact isn’t huge, Harvard’s Stavins said.
“That’s a sizeable number, but in terms of a big hit to the economy, in terms of re-charting economic growth, pushing us back into recession, that’s not a reasonable claim,” Stavins said. “This by itself is not going to be a huge hit to the economy.”
The EPA’s plan recognizes there will be losers. While jobs in industries such as coal and natural gas extraction will be lost, others will be created as investment increases in clean energy technology and services, the EPA says. The net effect of the proposal on employment will be small either way, said Stanford’s Goulder.
Coal-mining employment makes up a small share of total payrolls nationwide and has been declining for decades in the face of automation and cheap natural gas. Coal-mining payrolls have plunged 13 percent since January 2012, to 78,000 in May.
The impact will be greater in coal-producing areas like West Virginia, where the mining industry accounted for 5.5 percentage points of the state’s GDP growth in 2013, data from the Bureau of Economic Analysis show. Without it, the state’s economy would have contracted.
“If we had to make the shift overnight, it would be devastating,” Randy Huffman, cabinet secretary for West Virginia’s environmental protection department, said in an interview.
Some investors, too, would take a hit. The Russell 3000 Coal Index, made up of the biggest U.S. coal companies including Consol Energy Inc. and Peabody Energy Corp., is down 38 percent since the start of 2012, compared with a gain of 58 percent for the broader Russell 3000 index.
During the same period, bonds in the Bank of America Merrill Lynch U.S. High Yield Coal Index have returned 8.4 percent. That compares with a 31 percent return on the broader U.S. high-yield index.
Regulation has “destroyed equity value, and it’s destroyed bondholder value,” said Mark Pibl, head of U.S. fixed-income research and strategy at Canaccord Genuity Inc. in New York.
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